A prolonged confrontation over the nation’s debt ceiling — unlike the “fiscal cliff,” which provoked many scary headlines – could truly be grave for both America and the world. While press coverage often mentions the possibility of lowered credit ratings for the US Treasury (again), that might only be the mildest consequence if Republicans in Congress actually refuse to authorize borrowing and avoid default.
Last time the nation prepared to face such an impasse, during the spring and summer of 2011, the chairman of the Treasury Borrowing Advisory Committee – a JPMorgan Chase official named Matthew Zames – laid out a disturbing scenario in a letter to Treasury Secretary Tim Geithner, in which he foresaw a rolling catastrophe that could inflict hundreds of billions in additional borrowing costs; spark a run on money funds, leading to a renewed financial crisis; severely disrupt financial markets and borrowing, killing fragile economic growth; and push the economy back into recession due to higher interest rates and tightened credit.
In short, the economy would contract sharply and the U.S. – along with the rest of the world – might well be plunged back into negative growth. If that was true in July 2011, it is equally true today, and there is no reason to dismiss that warning.
But the Republican leadership on Capitol Hill insists that they are willing to take these mind-boggling risks, solely for the purpose of enforcing an extreme austerity regime that has already done permanent damage in much of Europe. Between the “Boehner rule” demanded by House Speaker John Boehner, which requires a dollar in new spending cuts for every dollar increase in the debt ceiling, and the House Republican budget authored by Rep. Paul Ryan, congressional Republicans evidently want not only to gut Medicare, Social Security, and Medicaid, but to “eliminate more and more of the basic functions of government over time,” according to the Center on Budget and Policy Priorities. No education aid, no food safety inspections, no environmental protection, no infrastructure repairs, no cancer research…
From immediate economic jeopardy to long-term national decline, these prospects are obviously appalling – yet many Republican elected officials sound positively pleased about the debt ceiling crisis they have created. Senator Tom Coburn, Republican of Oklahoma, told a right-wing radio host recently that a government default would actually be a “wonderful experiment.” He assured listeners, quite falsely, that their Medicare and Social Security checks would continue to arrive every month, no matter what, and that only “stupid” spending would be cut.
If Coburn – or any Republican senator – is so eager to test the debt ceiling, perhaps he should volunteer to bump up against it first. As the Tulsa World reported in 2011, federal spending in Oklahoma amounts to three times as much as the entire state budget, with Social Security alone accounting for almost a billion dollars a month there, and Medicaid and other medical assistance amounting to another $500 million-plus. Coburn’s ultra-conservative, deep-red home state is highly dependent on federal employment and assistance, ranking 12th in retirement and disability payments and 11th in per capita federal payroll, despite its small size.
So by all means, let’s find out, as Coburn suggested, whether we can live “on the money that’s coming into the Treasury” without borrowing to finance those monthly pension checks and all those stupid federal jobs — and let’s start in Oklahoma, tomorrow. Then let’s roll out the same experiment in every state whose senators and representatives are refusing to pay the bills they have already racked up over the years – especially states, like most of those below the Mason-Dixon line, where federal spending is far higher than the tax revenues remitted to Washington.
Surely that would silence all the loud talk about this “wonderful” experiment in fiscal brinksmanship.
By: Joe Conason, The National Memo, January 16, 2013
Paul Krugman on Sunday accused the Republican leadership of holding the country hostage.
The Nobel-Prize winning economist and New York Times columnist argued that congressional Republicans are “threatening to blow up the world economy” if they don’t get their way in the debt-ceiling debate. After a difficult fiscal cliff battle, President Barack Obama said he would not negotiate over the debt ceiling, but Republicans have said they won’t authorize an increase in the country’s spending limit without major spending cuts.
“We should not allow this to become thought of as a legitimate or normal budget strategy,” Krugman said on ABC’s “This Week.” “This is hostage taking.”
Krugman has made similar statements in the past, particularly when defending the idea of minting a trillion-dollar platinum coin to avoid the debt ceiling crisis — a loophole the White House ruled out Saturday. In a blog post earlier this month, Krugman argued that Obama should be ready to mint the coin because it offered a “silly, but benign” solution to the crisis. The alternative: Putting the nation’s ability to meet its financial obligations at risk, an option that Krugman described as “both vile and disastrous.”
“The debt ceiling is a fundamentally stupid but dangerous thing,” Krugman said on “This Week.” “It’s incredibly scary, this is much scarier than the fiscal cliff,” he added later.
If Congress does nothing to raise the debt ceiling, the U.S. could lose its ability to meet its financial obligations by as early as February 15, according to a recent report from the Bipartisan Policy Center. Republican leaders and the White House came to an agreement earlier this month to address the so-called fiscal cliff, a combination of tax increases and spending cuts that economists warned could have plunged the country into recession.
By: Jillian Berman, The Huffington Post, January 13, 2013
“The Secret Of Our Non-Success”: Mitt Romney Will Make Policy Based On Fantasies Rather Than Grappling With Reality.
The U.S. economy finally seems to be recovering in earnest, with housing on the rebound and job creation outpacing growth in the working-age population. But the news is good, not great — it will still take years to restore full employment — and it has been a very long time coming. Why has the slump been so protracted?
The answer — backed by overwhelming evidence — is that this is what normally happens after a severe financial crisis. But Mitt Romney’s economic team rejects that evidence. And this denialism bodes ill for policy if Mr. Romney wins next month.
About the evidence: The most famous study is by Harvard’s Carmen Reinhart and Kenneth Rogoff, who looked at past financial crises and found that such crises are typically followed by years of high unemployment and weak growth. Later work by economists at the International Monetary Fund and elsewhere confirmed this analysis: crises that followed a sharp run-up in private-sector debt, from the U.S. Panic of 1893 to the Swedish banking crisis of the early 1990s, cast long shadows over the economy’s future. There was no reason to believe that this time would be different.
This isn’t an after-the-fact rationalization. The Reinhart-Rogoff “aftermath” paper was released almost four years ago. And a number of other economists, including, well, me, issued similar warnings. In early 2008 I was already pointing out the distinction between recessions like 1973-5 or 1981-2, brought on by high interest rates, and “postmodern” recessions brought on by private-sector overreach. And I suggested that the recession we were then entering would be followed by a prolonged “jobless recovery” that would feel like a continuing recession.
Why is recovery from a financial crisis slow? Financial crises are preceded by credit bubbles; when those bubbles burst, many families and/or companies are left with high levels of debt, which force them to slash their spending. This slashed spending, in turn, depresses the economy as a whole.
And the usual response to recession, cutting interest rates to encourage spending, isn’t adequate. Many families simply can’t spend more, and interest rates can be cut only so far — namely, to zero but not below.
Does this mean that nothing can be done to avoid a protracted slump after a financial crisis? No, it just means that you have to do more than just cut interest rates. In particular, what the economy really needs after a financial crisis is a temporary increase in government spending, to sustain employment while the private sector repairs its balance sheet. And the Obama administration did some of that, blunting the severity of the financial crisis. Unfortunately, the stimulus was both too small and too short-lived, partly because of administration errors but mainly because of scorched-earth Republican obstruction.
Which brings us to the politics.
Over the past few months advisers to the Romney campaign have mounted a furious assault on the notion that financial-crisis recessions are different. For example, in July former Senator Phil Gramm and Columbia’s R. Glenn Hubbard published an op-ed article claiming that we should be having a recovery comparable to the bounceback from the 1981-2 recession, while a white paper from Romney advisers argues that the only thing preventing a rip-roaring boom is the uncertainty created by President Obama.
Obviously, Republicans like claiming that it’s all Mr. Obama’s fault, and that electing Mr. Romney would magically make everything better. But nobody should believe them.
For one thing, these people have a track record: back in 2008, when serious students of history were already predicting a prolonged slump, Mr. Gramm was dismissing America as a “nation of whiners” experiencing a mere “mental recession.” For another, if Mr. Obama is the problem, why is the United States actually doing better than most other advanced countries?
The main point, however, is that the Romney team is willfully, nakedly, distorting the record, leading Ms. Reinhart and Mr. Rogoff — who aren’t affiliated with either campaign — to protest against “gross misinterpretations of the facts.” And this should worry you.
Look, economics isn’t as much of a science as we’d like. But when there’s overwhelming evidence for an economic proposition — as there is for the proposition that financial-crisis recessions are different — we have the right to expect politicians and their advisers to respect that evidence. Otherwise, they’ll end up making policy based on fantasies rather than grappling with reality.
And once politicians start refusing to acknowledge inconvenient facts, where does it stop? Why, the next thing you know Republicans will start rejecting the overwhelming evidence for man-made climate change. Oh, wait.
By: Paul Krugman, Op-Ed Columnist, The New York Times, October 21, 2012
Last week Ben Bernanke, the Federal Reserve chairman, announced a change in his institution’s recession-fighting strategies. In so doing he seemed to be responding to the arguments of critics who have said the Fed can and should be doing more. And Republicans went wild.
Now, many people on the right have long been obsessed with the notion that we’ll be facing runaway inflation any day now. The surprise was how readily Mitt Romney joined in the craziness.
So what did Mr. Bernanke announce, and why?
The Fed normally responds to a weak economy by buying short-term U.S. government debt from banks. This adds to bank reserves; the banks go out and lend more; and the economy perks up.
Unfortunately, the scale of the financial crisis, which left behind a huge overhang of consumer debt, depressed the economy so severely that the usual channels of monetary policy don’t work. The Fed can bulk up bank reserves, but the banks have little incentive to lend the money out, because short-term interest rates are near zero. So the reserves just sit there.
The Fed’s response to this problem has been “quantitative easing,” a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost the economy even though conventional monetary policy has reached its limit.
Sure enough, last week’s Fed announcement included another round of quantitative easing, this time involving mortgage-backed securities. The big news, however, was the Fed’s declaration that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In plain English, the Fed is more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher.
The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.
This is very much the kind of action Fed critics have advocated — and that Mr. Bernanke himself used to advocate before he became Fed chairman. True, it’s a lot less explicit than the critics would have liked. But it’s still a welcome move, although far from being a panacea for the economy’s troubles (a point Mr. Bernanke himself emphasized).
And Republicans, as I said, have gone wild, with Mr. Romney joining in the craziness. His campaign issued a news release denouncing the Fed’s move as giving the economy an “artificial” boost — he later described it as a “sugar high” — and declaring that “we should be creating wealth, not printing dollars.”
Mr. Romney’s language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. “Aggressive monetary policy can reduce the depth of a recession,” declared the George W. Bush administration in its 2004 Economic Report of the President. And the author of that report, Harvard’s N. Gregory Mankiw, has actually advocated a much more aggressive Fed policy than the one announced last week.
Now Mr. Mankiw is allegedly a Romney adviser — but the candidate’s position on economic policy is evidently being dictated by extremists who warn that any effort to fight this slump will turn us into Zimbabwe, Zimbabwe I tell you.
Oh, and what about Mr. Romney’s ideas for “creating wealth”? The Romney economic “plan” offers no specifics about what he would actually do. The thrust of it, however, is that what America needs is less environmental protection and lower taxes on the wealthy. Surprise!
Indeed, as Mike Konczal of the Roosevelt Institute points out, the Romney plan of 2012 is almost identical — and with the same turns of phrase — to John McCain’s plan in 2008, not to mention the plans laid out by George W. Bush in 2004 and 2006. The situation changes, but the song remains the same.
So last week we learned that Ben Bernanke is willing to listen to sensible critics and change course. But we also learned that on economic policy, as on foreign policy, Mitt Romney has abandoned any pose of moderation and taken up residence in the right’s intellectual fever swamps.
By: Paul Krugman, Op-Ed Contributor, The New York Times, September 16, 2012